Are These People Really Worth $200 Million?

The Participants

CHAN SUH, 37, a former promotions staffer at New York Magazine, designed a Website for Vibe magazine and, in the basement of Time Inc., created, now among the foremost advertising agencies specializing in the Internet.

TODD KRIZELMAN and STEPHAN PATERNOT, both 25, co-CEOs of, a “community” site, took their company public last November in one of the largest first-day run-ups of all time. Their company, with revenues last year of $5.5 million and a cumulative loss of $20 million, now has a market value of $800 million.

MICHAEL WOLFF, 45, writes the “Media” column at New York. Wolff’s book Burn Rate, published last year, is his story of the birth of the Internet industry – AOL, Wired, the search engines, the race for venture capital, Silicon Valley and Silicon Alley – and the rise and fall of his own business, Wolff New Media.

BRUCE JUDSON, 40, is a co-founder of Time Warner’s Pathfinder – one of the first sites to develop advertising on the Web. He’s written two books on Internet business – NetMarketing and HyperWars – and now runs the Judson Group, which holds stakes in several start-up Internet enterprises, including

MARY ANN PACKO, 43, is a former director of the Internet Advertising Bureau. She is president and COO of Media Metrix, one of the leading Internet-audience-measurement companies.

MARTIN NISENHOLTZ, 44, is president of the New York Times Electronic Media Company. He was previously Ameritech’s new-media czar and, before that, founder of the interactive-marketing group at Ogilvy & Mather.

SCOTT KURNIT, 44, a former senior executive at Prodigy and CEO of the ill-fated News Corp.-MCI enterprise iGuide, launched the in 1997. The company, with 1998 revenues of $3.7 million and a cumulative loss of $26.6 million, went public last month and now has a market value of $976 million.

A year ago, New York’s Silicon Alley was a ragtag group of companies, few of which had ever earned a dime. But over the past twelve months, eight companies in the city doing dot-com business have sold stock to the public and reaped a market value of $14 billion. During the next few months, thirteen more companies will race to “get out” (before the bubble bursts) and realize an additional worth of as much as $28 billion – making the Internet, at least in terms of market value, one of the biggest businesses in the city.

New York invited some of the executives of these enterprises – and some of the city’s nouveau deca-millionaires – to sit down and discuss the state of the business. The discussion, moderated by New York’s media columnist Michael Wolff (who is also the author of the controversial Internet-industry memoir Burn Rate), confronted the basic questions raging in and out of the Internet industry: When will Internet companies make money, and when will they get into trouble if they don’t? Do big media companies really know the difference between old and new media? In the end, when all is said and done, who will be left standing? And, of course, how does it feel to be rich beyond all imagination?

The discussion included the CEOs of two newly minted public Internet companies – Scott Kurnit of the, and Stephan Paternot and Todd Krizelman, co-CEOs of – as well as Mary Ann Packo, president and COO of Media Metrix, a soon-to-go-public Internet company; the president of an old medium’s new-media company, Martin Nisenholtz of the New York Times; a new-media adman, Chan Suh; and Internet pioneer and author Bruce Judson.

The collective net worth represented at the roundtable: something upwards of $200 million. The discussion took place in New York’s offices in midtown Manhattan.

Michael Wolff: There are people at this table who are now rich beyond ordinary comprehension . . .

Chan Suh: Pointing at Kurnit Him.

Wolff: … everyone except me . . .

Martin Nisenholtz: Hey, I work for the New York Times.

Wolff: … and Martin.

Suh: Hey, I make $75,000 a year.

Wolff: Do we have that on tape? Laughter Looking back on your own ride here – Scott, you’ve had some great success and also some not-great success laughter – can you start to come to conclusions? What do you owe it to?

Scott Kurnit: Oh, God. I think anyone who is running a public company … any of us would say that we’re at the beginning still. The reality is that as quick as wealth can be created in this industry, it can be also taken away. As much as you maybe say, “Oh, that’s not true; these guys have so much money,” the reality is that we don’t make that much in cash, and for this to work for management, you’ve got to have sustained success as a publicly held company for years going into the future.

Stephan Paternot: It’s almost like all the planets have aligned. There have been 100 times where our company could have not succeeded. We managed somehow to get the financing put together the first two years when, we couldn’t get any venture-capital money. We got the right management team. We kept trying. It’s a constant fight. Eventually you get to the IPO phase, which a lot of people view as “Oh, whew – made it.” But five seconds later, you’re off again.

Kurnit: Simply said, it’s a sprint to get to the IPO, and it’s a long-distance run thereafter.

Wolff: Can someone start today, somebody who is a nobody –

Nisenholtz: And be a somebody?

Wolff: Yes. And become a Net-somebody?

Judson: Yes, absolutely.

Todd Krizelman: As much as there is a lot more competition and it will take a lot more money to get you where you need to go, there are a lot more of those dollars available today for new ideas.

Paternot: You need to come up with a more and more unique idea now. I mean, if you’re just going to copy what’s already been done, you’re going to need a lot of money. But there’s a ton of room for unique ideas to take market share.

Judson: As soon as you get out with an idea, though, there are more and more people looking at you and wanting to copy you. The competitive environment is intense. We’ve never actually seen anything this intense.

Paternot: That’s why either you have to have the dollars to grow it massively or you’ll be a great acquisition target.

Mary Anne Packo: Right. Being a first mover is a tremendous advantage, but then you have to be willing to constantly be fluid and reinvent – to change with the tide, really.

Wolff: Let me ask what at least I think of as the seminal question of the moment considering the daily march of Internet companies – almost all without profits – going public at fabulous multiples: Are there any “bad” Internet companies?

Nisenholtz: I think the measurements are so radically different in the Internet space right now with respect to valuations, which is really what you’re talking about.

Judson: I don’t think there is a measurement, actually.

Krizelman: There are very high valuations for Internet companies. But the reality is, there are very few other industries where companies are growing this fast. Many of these companies are growing 100 percent per quarter.

Judson: Growing in what?

Krizelman: In revenue.

Judson: And in concurrent losses as well.

Krizelman: But not at the same growing rate.

Judson: Yeah, but typically what you’re seeing is revenues growing and losses increasing.

Paternot: Right, but how do you quantify a bad company, even in these circumstances?

Wolff: Which is why, at least for the present, the market seems to have concluded that there are no bad Internet companies.

Kurnit: I don’t agree at all. The dozens and dozens of companies that gone through the IPO process have had to get over the hurdles set by accountants, bankers, and 200 different institutions that you meet along the way.

Nisenholtz: But I think you’re asking a bigger question, which is: Are there business models on the Internet right now that we’re comfortable saying are sustainable?

Wolff: Let’s make this real. Who would you sell at this point? What companies, or what sectors of this industry?

Judson: Anyone who depends solely on ad revenues, anyone who says, “I am going to create original content, and I am going to make money based on ad revenues,” without any other clear sources of revenue. My issue is that typically the cost of content and marketing to bring in an audience and hold it makes it impossible for an ad-supported business to be profitable.

Nisenholtz: But the funny thing is that if you look at the revenue multiples, the numbers, the companies that are being rewarded the most right now are content companies.

Wolff: Have we come around again? There was the period in which content was king, and then you couldn’t get arrested if you were in the content business – you certainly couldn’t get financing for a content-driven new-media business. Are we back in business on the content side, and therefore, I might argue, on the New York side?

Kurnit: Stewart Alsop said it to me best when I went out to pitch my business to him. He said, “Scott, when has a VC ever financed a movie, a book, or a magazine?” Part of the problem of New York, which is the content center of the universe, is that venture capital is the traditional form of financing. VC financing is required for Internet companies, because unless you’re lucky enough to launch out of your dorm room, you require large amounts of capital. In New York, the corporate players are not the financial players. The Time Warners and the Viacoms do not finance start-ups. It’s not what they have historically done. So you went out to California, and California says, “We don’t know what content is. We’ve never invested in a content business.”

So in a lot of ways, when you were looking for financing, it wasn’t that you weren’t right. It was that the financing sources didn’t understand you. So those of us who were either hybrids, where we had different kinds of models, or able to get the financing to get to a level, people said, “You know what? Content is a good idea.”

Suh: I sort of reject the notion that content was at any time out of the picture. Financing is not the final validation of content. Consumption is the final validation of content. And if you measure consumption, the Internet has, if anything, been voracious about content.

Judson: Except that people won’t pay for it.

Suh: The phenomenon of people paying for old content or refusing to pay for old content is interesting. The Times is a good example, I think. I pay to look things up that have already been published in the New York Times. I pay money, and I am glad to pay money to do that. But for breaking news? Not really. So what is it that I am paying for? Is it the ability to aggregate the source of information from an authoritative source and get the concept that I want, when I want it?

Nisenholtz: Breaking news is really a commodity. It’s provided principally by news wires. It doesn’t take much analysis or depth of thinking. It’s breaking news. I think what people pay for among the old media, to put it that way, are the considered thoughts and editing capabilities of people who spend their lives doing this.

Wolff: Let’s step back. At what point does new media have to be at least as profitable and efficient as old media?

Suh: Day one.

Wolff: Okay, but that’s clearly not true … laughter

Paternot: Measured by investor return?

Judson: The question comes down to, can you create a sticky community? I mean a loyal audience, the kind of audience loyalty that you get in old media. The answer is no.

Kurnit: No, I will not accept that –

Judson: I knew you wouldn’t.

Kurnit: I grew up in television, which is why I’m comfortable that a medium that attracts users can charge advertisers, and as long as you have the balance of cost versus revenue in place, you’re fine.

Paternot: If you’re able to aggregate a huge audience, then your cost structure can be lower than broadcast. On the Internet, your cost of transmission can be virtually zero.

Judson: It seems to me that we have not yet seen any of the major television studios say, “Internet media is definitely the future.” What they have done is bought in, in an inexpensive way, using airtime and other kinds of things. So that while you read a lot about their affiliations with new-media ventures, no one has stepped up and said, “This is so much the future that, like AT&T, I have to buy TCI.”

Kurnit: First we have to say, how valuable is the Internet in its way of changing communications and commerce as dramatically as the printing press and computing and television did? If we believe that it is a dramatic change, then the metrics of looking at old-media companies don’t make sense.

Wolff: Let me also ask a question in the other way – not about old-media companies judging new-media companies but new-media companies using the incredible values of their share prices to buy old-media companies. Last fall, I suggested in my New York column that CBS was a likely acquisition for AOL. This is now the rumor du jour. Could it happen? Should it happen?

Nisenholtz: It would be a drop in the bucket for AOL, too, which is so extraordinary. But I think the competencies and the whole range of services offered in the Internet space are not necessarily, to use an overused word, synergistic with a broadcast network.

Suh: It really depends on whether you’re building a portfolio or building a company.

Nisenholtz: Broadcast networks, with all due respect to television, sell mass undifferentiated eyeballs for the most part, and I think on the Internet we’re trending toward targeted one-to-one media.

Wolff: But AOL would certainly insist that it is a media organization. Media is trending toward package. What’s the package that I can sell? If I can only sell online, it’s going to be difficult for me to compete with ad-sales organizations like Time Warner, for instance.

Paternot: Your ability to reach someone is far greater if you’re working on both sides, the Internet and the broadcast side. And who is to say that four or five years down the road, 5 percent of the population or 10 percent of the population now has HDTVs, and through their cable lines they’re no longer just getting dumb broadcast images, but they are digitally transmitted. It’s on that very same line that someone could take out a 30-second ad, and instead of putting in a dumb ad, it’s now a 30-second ad targeted to young men in their mid-twenties. Or something even more specific, one-on-one to me.

Nisenholtz: Well, hold on. I wasn’t suggesting at all that there isn’t commonality between Internet companies and video. What I was saying is that the commonality between an Internet company and a traditional mass-market broadcaster is a difficult one for me. I know a lot of the people who work in those companies. I’ve worked with them for twenty years. And I’ve got to tell you, if you combine with CBS, you will have two separate operations! Laughter

Wolff: Well, let’s look forward. Just take a step. Let’s look nine months, eighteen months ahead. What happens in a broadband world?

Kurnit: Broadband is not a nine-month … It may be three to four years . . .

Nisenholtz: Traditional broadcast has an infrastructure and a way of thinking that is very one-way, and it’s not going to play in an interactive broadband world. Interactive television is an oxymoron that has never worked and will never work. I have a feeling it’s going to be a lot more about videoconferencing. And by the way, videoconferencing of all kinds.

Suh: Oh, Martin!

Paternot: If you just look at what happens in general human nature now in the real world, you spend mostly a few hours a day watching one-way media. The rest of your day, from business to hanging out after work, you’re having constant little interactions with people. Now all of a sudden, online, you can do the same thing. I don’t think broadband is going to suddenly mean “Oh, I have a big enough pipe to watch ten hours of Seinfeld online.”

Nisenholtz: Or that you want to interact somehow with Seinfeld and change the endgame. I mean, what a ridiculous thing.

Wolff: Well, what do you do if you’re running an old-media company?

Krizelman: I don’t know if it’s as much of an enigma as we’re making it out to be. At the very top level, someone says – and it’s probably Mel Karmazin – “We’re going to figure it out, we’re going to place invest ments all over the place, we’re going to start it internally if we need to as well.” And they go for it.

Packo: Look at Disney, for instance – what did they do? The Starwave deal, the Infoseek deal. Then they created a whole new portal, And in there, all the brands are showing up – ABC, ESPN. They’re really merging the two, the Internet and their current way of being, to be really right for the future. They’re experimenting, they’re getting there. When we look at where the consumers go, they do go to trusted brands, but they also certainly gravitate to the Yahoos and to the Excites.

Kurnit: Are you saying those aren’t trusted brands?

Packo: They’re trusted brands, but they’re not the traditional brands. They’re new brands.

Wolff: Scenarios for the bubble bursting. You must think about it all the time. We all think about it. We all assume it will happen.

Krizelman: It feels more like a constant series of corrections. About a year after Netscape went public, at that point a lot of people felt that the craziness was gradually disappearing. Back then, of course, we obviously proved that that wasn’t true. This past October was another time that we felt the bubble had burst. And again this January, there was another major correction. There’s a constant series of corrections.

Wolff: But it was a minor correction. Let’s talk about a scenario in which Internet companies lose half of their value and maybe three quarters of their value overnight.

Suh: It’s not a bubble; it’s a dome. And if something breaks, it’s going to be really painful to everybody, not just the Internet companies. It’s almost like Long-Term Asset Management. You couldn’t afford to let them burst. And I think it’s the same with some of these Internet stocks that you might call a bubble. If these things crash, it’s not the Internet crashing.

Wolff: So you’re saying that really the Internet is now too ingrained and has attracted too much capital for it to crash?

Suh: Yes. I mean, it may crash, but if it does, I think the entire market will crash rather than just the Internet sector.

Krizelman: I agree with that.

Judson: I do agree that it would trickle from the Internet to the rest of the market.

Suh: There will be clarity achieved. I think some companies will lose 50 percent, 60 percent, 80 percent, 90 percent of their value, but there will be others . . .

Paternot: A lot of the early players in the market have fallen out of favor. Unless they’ve completely redefined themselves, they’ve lost a huge amount of their market value.

Nisenholtz: Well, it’s like social Darwinism on the Internet, if you will. The early players … If you look back at ‘94, there was GNN and there was the wais Search Engine. There were all these players that don’t exist now.

Kurnit: But you see, that’s an interesting attitude. Every company that thinks that it should survive in its original form isn’t going to make it in the Internet.

Suh: You know, it’s not like this sector can go down and every Internet company just becomes worthless overnight. It can’t be that.

Judson: Well, you could have a biotechlike scenario. There was a time when everything in biotech was terrific, and then nothing in biotech was terrific, and then the quality re-emerged.

Suh: At some point, the Internet is going to disappear as a sector, and it’s going to just become … It’s like the telephone. It’s like saying, “Well, if the telephone sector goes down, many of us will go out of business.”

Judson: I actually think that the telephone sector, because of IP through the Internet, is questionable. Laughs

Wolff: Let me pursue this: By that logic, Amazon finds itself next year or the year after no longer in the Internet business but in the bookselling business or the retail business.

Suh: They always have been.

Wolff: Well, no, they haven’t. Because obviously, if they were, they would be valued on the level of the book business and the retail business.

Suh: No, that’s not true.’s great … the key to their great success is that they sell books really well.

Wolff: Well, if you discount books at 30 percent, virtually anybody could do it fairly well. I mean, they don’t sell books better than Barnes & Noble.

Kurnit: Yes they do. They absolutely do.

Wolff: They sell books online better than Barnes & Noble sells books online.

Kurnit: No, excuse me. They sell books better than Barnes & Noble. Period. Period!

Wolff: Our evidence?

Kurnit: Period!

Wolff: Period?

Kurnit: One, I buy three times more books than I did five years ago, and two, I will never step into a bookstore to buy a book. I will go in to browse and hang around and buy a cup of coffee. But when it comes time to buy, one-click ordering and thank you very much. They sell books better.

Suh: They sell books brilliantly.

Judson: Still, where does it end? When does someone make money? Laughter That’s kind of the concern.

Kurnit: People are making money left and right on Amazon right now!

Suh: Yeah, buddy!

Kurnit: This is no different than any other business in the history of mass retail. You know, everybody says it’s all price wars and it’s all price-sensitive. I’ve got to tell you, there’s a certain segment, and I include myself … I don’t care if Amazon charges me another dollar or two. I’m a loyal Amazon customer because that’s where I started off first.

Wolff: What I’m hearing is that there is some inevitability about Amazon achieving Barnes & Noble’s margins. That’s inevitable?

Kurnit: They might sell 50 times more books! Yes, they have to be profitable on every book they sell, but they don’t have to achieve the specific margins. It’s a completely different business, and it’s a completely different marketplace.

Suh: Maybe they can do better.

Wolff: So on a measurable basis, Amazon becomes a better business than Barnes & Noble?

Suh: Yeah, obviously . . .

Wolff: Yeah, obviously?

Suh: Yes.

Paternot: It’s a better business.

Suh: So if the question is, Is Amazon a viable business? Yes.

Wolff: Actually, the question was, If, as you began to say, that Amazon was not in the Internet business but was in the book business, at what point does it get judged on the same criteria that other businesses in bookselling get judged on?

Kurnit: You can’t possibly judge a business that operates at a completely different paradigm against the metrics of one in another one. How many books can you sell from a store on the corner of Third Avenue and 57th Street versus how many books can you sell on the corner of the Internet? One is limited, and one is unlimited. You can’t compare a bricks-and-mortar operation with one that has a worldwide market with incredibly low distribution or zero distribution costs.

Wolff: Well, you can literally compare. And that’s my question: At what point do you sort of sit down and say, “This is a better business than this one”?

Suh: You can compare, but you cannot make judgment calls using empirical criteria until the models both move a little bit.

Wolff: Huh?

Krizelman: At some point, you get into the realization that Amazon isn’t in the business of just selling books anymore. That’s just a fraction of their business. They’ve been able already to demonstrate that if you’re comfortable with their brand name for books, by the way, we’re going to start offering you music and movies, and each quarter, or every six months, we’re going to roll out a different product line, a different vertical market, where we’re going to dominate, because of the same thing Scott is saying. They can go and tap into a worldwide market.

Kurnit: Wal-Mart doesn’t have a very good book section. And if Amazon means to become Wal-Mart . . .

Nisenholtz: It does if you have an eighth-grade education.

Kurnit: Spoken like a true New York Timesman.

Wolff: Actually, Wal-Mart is the fastest-growing outlet in the book business.

Judson: They also sell more toys than anybody.

Suh: And bully for them! That’s great.

Judson: You tend to end up with two dominant players in most industries, and that’s –

Kurnit: That’s cool.

Judson: I mean, Burger King and McDonald’s . . .

Kurnit: Just as fast as we can consolidate down to two players is as fast as another player can come in. Think of Fox Television. Everyone said, “You can’t start another network.” And Murdoch, because he had vision, said, “I’m starting another one.” And he did it, and he did great. We will see another bookstore come up on the Internet 50 years from now and surpass Amazon. Fifty Internet years, of course. But there’s also another point: We’ll see people go into the book business if the book business succeeds, which we still haven’t seen.

Wolff: That is the point that I’m making: Amazon doesn’t make money.

Kurnit: But Michael, that’s so unfair. That’s so unfair! I mean, it’s such a … there’s a dozen different ways for Amazon to make money, some of them immediately and some of them longer-term. Amazon could make money today if it chose to, and then the question is how long would it sustain and would it grow? It could raise its prices today, and it would continue to do very well in the short term.

Suh: Time Warner doesn’t make money. It hasn’t made money in fifteen years. Time Warner hasn’t made money in fifteen years.

Nisenholtz: It hasn’t? Laughter

Wolff: It’s Internet accounting. Amazon is a success. Time Warner is a failure.

Kurnit: But to return to the basic premise, that a lot of businesses invest in the early years to get the payback in the later years – true or false?

Wolff: A lot of businesses invest against a plan that you can see.

Suh: The business plan says, “We will grow, and then we will make money.” Not the other way around. Okay?

Kurnit: When you plant apple trees, do you get apples your first year?

Wolff: We can make the assumption: We have seen apples. But we haven’t seen profits.

Suh: But what they’re saying, though, is that they’re investing in the future.

Kurnit: I’m told apples are a terrible business, actually.

Nisenholtz: These days it’s much better.

Kurnit: Apples?

Nisenholtz: Apple.

Paternot: In the Internet’s case, we’re making a guess that at some point, 6 billion people will be online. I look at a People magazine, which is successful in the United States out of 250 million potential people. Every single country has its People magazine. Now, what would you pay to be the One Almighty Magazine that takes every single country? You’d spend probably maybe five to ten years unprofitable if you could capture every one.

Wolff: I guess you’re bullish on the Internet.

Paternot: Otherwise, I’d be selling my stock.

Nisenholtz: Can you sell your stock?

Paternot: No. Laughter

Are These People Really Worth $200 Million?